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All PIIGS Are Equal, but Some Are More Equal Than Others

As a rule, I prefer to avoid the use of these acronyms whenever possible. In this case, however, I simply could not resist a nod to George Orwell's Animal Farm. In the novel you may recall that the pigs, who held a leadership position on the farm and became increasingly content with the perks associated with their power, eventually changed one of the central rules governing the farm from "all animals are equal" to "all animals are equal, but some are more equal than others." A similar theme can be applied to the troubled euro zone countries commonly referred to as the PIIGS (Portugal, Ireland, Italy, Greece and Spain). Although it is quite clear that all of the countries in this less-than-prestigious club are saddled with burdensome public debt and budget deficits (i.e., they are all equal in this respect), when one examines the nuances of each country's debt and deficit situation it becomes clear that there are a number of key factors distinguishing the bleak situation in Greece from that of its counterparts (i.e., some are more equal than others).

Taking Greece as the baseline where the crisis began, we know that the debt load of 115.1 percent of GDP is daunting and that a deficit of 13.6 percent of GDP does not portend well for the possibility of debt reduction in the near future. Glancing at Figures 1 and 2, however, it is clear that these numbers are indeed roughly in line with Greece's counterparts in the PIIGS club. One of the defining characteristics of the Greek situation, besides the sheer size of the debt burden and lack of opportunities for growth, is the unreliability of the government data. For these factors, Greece has been severely punished in the sovereign debt markets.

Figure 1

Figure 2

To begin our comparison, we turn to Italy first. Italy's public debt is a similarly eye-popping 115.8 percent of GDP, yet 10-year Italian sovereign debt fetches a comparatively low 4 percent yield (Figure 3). True, Italy's deficit is a more manageable 5.3 percent of GDP, but to better understand the situation we must also examine the composition of Italian debt. Italians save roughly 15 percent of their after-tax income. Much of this savings is recycled into government bonds, leaving foreigners holding a comparatively lower portion of Italy's public debt. This leaves the country much less susceptible to a Greek style bond market rout. Moreover, the sheer size of the Italian debt market is consoling simply because of the liquidity that it provides.

Figure 3

Turning to the other end of the spectrum, Spain's total debt-to-GDP ratio at 53.2 percent is actually lower than the euro zone average and, in fact, below that of EU stalwarts Germany and France. What sets Spain apart is a massive hangover from the bursting of the country's property boom. Clearly growth and deficit spending are the watchwords in Spain. To tackle the problem, regain credibility in the sovereign debt market and rein in an 11.3 percent deficit, Spain has announced numerous public spending cuts. Additionally, while Spain's unemployment rate of 20 percent is likely to drag on future growth, some have argued that a culture of extended family support networks and participation in a vibrant black economy have historically lessened the effects of long-term unemployment on the economy.

Similar to Spain, Ireland is also suffering the aftereffects of a property bust. While Ireland's total debt-to-GDP ratio of 64 percent is also below the euro zone average, the country is saddled with a deficit of 14.3 percent, higher than that of even Greece. To address this deficit, Ireland has introduced a range of austerity measures with a focus on spending cuts, rather than tax increases. Furthermore, Ireland is unique in that it has the potential to address its deficit situation from the growth side of the equation. The OECD forecasts 2011 growth in Ireland to be 3.00 percent (Figure 4), the highest among the PIIGS. As the U.S. and UK are two of Ireland's main trading partners, this largely export led growth will be further aided if the euro continues to weaken against the USD and the GBP.
Figure 4

In rather stark contrast to its brethren in the PIIGS club, Portugal did not gorge on cheap euro zone credit, nor did it experience a property boom and subsequent bust on the scale of Spain or Ireland. In fact, Portugal has the dubious credential of posting the lowest euro zone GDP growth throughout the boom years. With a relatively manageable debt load of 76.8 percent of GDP, markets are focused squarely on Portugal's 9.4 percent deficit and limited prospects for future economic growth. Portugal has responded to market concerns with cuts in government spending and tax increases to plug the deficit. While the effects of these measures remain to be seen, it must be noted that, unlike Greece, Portugal can boast credible government finances and a track record of successfully implementing deficit busting austerity measures. Moreover, in another contrast to other members of the PIIGS club, the Portuguese populace has largely refrained from taking to the street to protest against the government's actions.

As evidenced above, when grouping these countries together as "equal," we risk misunderstanding the broader threats to the euro zone and ultimately, the value of the euro. If the situation in Greece can be firewalled through, at best economic growth and deficit reduction or — at worst and most likely — an orderly debt restructuring, contagion to the euro zone periphery and European banking sector can be minimized. Likewise, the greatest threat to the euro zone may not be default contagion and dismantling of the euro, but rather an extended period of subpar growth resulting from the wave of austerity measures sweeping across the continent.

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those of the author and do not reflect the views of SVB Financial Group,
or Silicon Valley Bank, or any of its affiliates. This material,
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As a rule, I prefer to avoid the use of these acronyms whenever possible. In this case, however, I simply could not resist a nod to George Orwell's Animal Farm. In the novel you may recall that the pigs, who held a leadership position on the farm and became increasingly content with the perks associated with their power, eventually changed one of the central rules governing the farm from "all animals are equal" to "all animals are equal, but some are more equal than others." A similar theme can be applied to the troubled euro zone countries commonly referred to as the PIIGS (Portugal, Ireland, Italy, Greece and Spain). Although it is quite clear that all of the countries in this less-than-prestigious club are saddled with burdensome public debt and budget deficits (i.e., they are all equal in this respect), when one examines the nuances of each country's debt and deficit situation it becomes clear that there are a number of key factors distinguishing the bleak situation in Greece from that of its counterparts (i.e., some are more equal than others).

Taking Greece as the baseline where the crisis began, we know that the debt load of 115.1 percent of GDP is daunting and that a deficit of 13.6 percent of GDP does not portend well for the possibility of debt reduction in the near future. Glancing at Figures 1 and 2, however, it is clear that these numbers are indeed roughly in line with Greece's counterparts in the PIIGS club. One of the defining characteristics of the Greek situation, besides the sheer size of the debt burden and lack of opportunities for growth, is the unreliability of the government data. For these factors, Greece has been severely punished in the sovereign debt markets.

Figure 1

Figure 2

To begin our comparison, we turn to Italy first. Italy's public debt is a similarly eye-popping 115.8 percent of GDP, yet 10-year Italian sovereign debt fetches a comparatively low 4 percent yield (Figure 3). True, Italy's deficit is a more manageable 5.3 percent of GDP, but to better understand the situation we must also examine the composition of Italian...Read More

"I don't entirely understand the usefulness of debt-to-GDP as a metric. It's the interest expense that matters (along with the average life of the outstanding debt). If I borrow to buy a house, will SVB look at the ratio of my income to the home value? Or is it more likely they'd look at debt service to income? Interest expense to GDP strikes me as a much more relevant measure as to just how much of a burden the debt really is."

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